FTC challenges acquisition of physician group by Boise health system

Hospitals have been acquiring physician practices and have been doing so for years, but a case resting in the hands of a federal judge in Boise is proving to be a “banner” case for these sorts of mergers and acquisitions.

The case, pitting St. Luke’s Health System of Boise and the Saltzer Medical Group of Nampa, Idaho against the Federal Trade Commission, the state of Idaho and St. Luke’s biggest competitor, St. Alphonsus Medical Center (and others), raises questions about what it takes – or doesn’t take – to achieve health reform’s goals of more integrated care and efficiencies.

[See also: Hospital consolidation rising]

At issue is St. Luke’s December 2012 acquisition of Saltzer Medical Group, the largest and oldest independent, multispecialty physician group in Idaho.

Based in Nampa, about 20 miles west of Boise, the for-profit Saltzer Medical Group had about 44 physicians in family practice, internal medicine and pediatrics.

The FTC and the other plaintiffs allege that St. Luke’s acquisition of Saltzer violates antitrust regulations by lessening competition in the Nampa area and potentially will lead to higher healthcare costs for consumers, insurers and employers. Because St. Luke’s and Saltzer, individually, have such large shares of the adult primary care services market in the Nampa region (nearly 39 percent for Saltzer and nearly 18 percent for St. Luke’s, according to the complaint filed by the FTC and the state of Idaho), their combined market share would be almost 57 percent – a concentration that exceeds federal merger guideline threshold levels.

St. Luke’s and Saltzer say that the acquisition is vital to their being able to achieve the goals of healthcare reform and maintain business viability.

[See also: Healthcare partnerships changing]

“If you agree fundamentally that the problems are fee-for-service, fragmentation, lack of care coordination and lack of data sharing … if we’re talking about that, we’ve got to make care seamless and integrated and we’ve got to change to pay-for-value and we’ve got to decrease the fragmentation, then all of that seems to say what we need is for all these pieces to come together and work in a clinically-aligned and financially-aligned model,” said David Pate, MD, JD, president and CEO of St. Luke’s.

To help it reach the goals of healthcare reform, St. Luke’s came to the conclusion that it needed a nucleus of employed physicians, mainly, Pate said, to undertake population health management within the community and to transform from fee-for-service to pay-for-value.

The doctors of Saltzer Medical Group came to the conclusion several years ago that its business model – fee-for-service – would not align with the direction healthcare reform was going and that they didn’t have the resources it felt were needed to make changes, said John Kaiser, a Saltzer physician specializing in obstetrics and gynecology. After a three-year decision process, the group chose to merge with St. Luke’s because its vision of lowering costs and managing care was the same as Saltzer’s.

Kaiser says he understands the concerns that have been raised. “I understand the dilemma of this being new and being a concern to some parties,” he said. “I do think though, that to be able to change, sometimes you have to be given some leeway and some trust to move forward. I think there’s enough safeguards in the system to never let abuse of the system occur. We’re in a very regulated industry and those abuses become apparent very readily, especially if you’re big. … We’re not blind to what abuses could occur. I think we have integrity that we wouldn’t allow that to happen and I think there’s enough safeguards in the system to prevent those from advancing.”

The FTC, St. Alphonsus and a handful of other local businesses, aren’t so sure, though.

The FTC began investigating the possibility that the merger would violate antitrust regulations before the merger happened, but St. Luke’s chose not to wait for the government’s investigation to finish.

St. Alphonsus filed suit to block the sale, said the hospital’s attorney, David Ettinger, but the judge didn’t grant the request for a preliminary injunction. However, it was settled that the integration between St. Luke’s and Salzter would happen gradually and that the deal between the two could be unwound if the judge rules that the merger violates antitrust regulations.

St. Alphonsus, which is part of CHE Trinity Health, one of the country’s largest Catholic health systems, was and is concerned that the acquisition would mean referrals from Salzter doctors would go to St. Luke’s primarily, leaving St. Alphonsus at a severe disadvantage and eliminating choices for community members.

But St. Luke’s CEO sees just the opposite – that the acquisition will offer community members more choice. “If we don’t do this transaction and we don’t proceed along our strategy, then what’s gong to happen? Idahoans only have choices of fee-for-service providers. That’s all they can get,” said Pate. “So frankly, the way that we look at this and what we’re telling the court is actually this is going to promote greater choice. We’re introducing a new product into the market and that gives people more choice.”

Giving people more choice and achieving the goals of healthcare reform doesn’t require acquiring more and more physicians, said Ettinger. “Our view is (St. Luke’s) own actions showed that you don’t need to acquire physicians to achieve the goals of healthcare reform,” said Ettinger, referring to St. Luke’s acknowledgement that it needs to work with independent physicians as well as having a core of employed physicians. “I think that’s happening all around the country that people are establishing clinically integrated networks … and doing so with independent physicians as well as employed physicians, and that gives more choice to the community and more choice to the physicians.”

The questions raised by this case – about market exclusion and potentially higher prices; whether or not financial and clinical integration is necessary for healthcare reform to be achieved; and whether or not the efficiencies and the improvements in healthcare and access can really be realized – is what makes this case so important, said Dale Grimes, a Nashville, Tenn.-based lawyer who leads the antitrust and trade practices group at Bass, Berry & Sims.

“I think the St. Luke’s case is at the forefront of what’s going on in healthcare mergers and consolidation at this point,” he said. “It’s the banner case.”

A nearly 60 percent market share is really large, Grimes said, so the question becomes why would that be justified. “Are there things that are so good, so competitive, so beneficial to healthcare generally that it ought to be allowed in spite of that? (That) on balance, it’s not really going to be harmful? And I think that’s where (the FTC and other plaintiffs) are not convinced.”

Which raises the question, is there another way? Do you have to create goliaths in order to reach the goals of healthcare reform or are there other ways?

“I believe that there’s a sense in the industry that this is really required by healthcare reform,” said Grimes. “With the new methods of payment and all of the various changes that are going into effect, that they only way they can deal with that is by consolidating with other providers.”

But that isn’t necessarily the only path, Grimes said. Other organizations around the country have created partnerships with physicians and other providers that do not require acquisition. St. Luke's acknowledged that a hybrid model in this case could work.

With the FTC having said that it will be carefully watching the healthcare industry for antitrust concerns, hospitals and physicians need to be extra cautious about consolidating.

The FTC historically has been more aggressive about challenging horizontal deals – hospital to hospitals, said Jeffrey Jacobovitz, a litigation partner at Arnall Golden Gregory and co-chair of the firm’s antitrust group, but this case, one of the first hospital-physician mergers the FTC has challenged, may indicate that the FTC is broadening its watchfulness. Jacobovitz, a former FTC attorney, said the governmental agency may even begin retrospective reviews of hospital-physician deals to make sure antitrust regulations are not being violated.

This case and the increased interest by the FTC in hospital-physician integration should make these entities more cautious as they consider merging, said Jacobovitz.

“You have to make sure you calculate what your market shares are before you start the expensive proposition of going forward with the merger and then you have to decide whether you would risk it and whether the government would challenge it, and you know, if you take it to trial, it’s possible you’re going to prevail but that’s an expensive proposition.”

The expense Saltzer, in particular, is facing if U.S. District Judge B. Lynn Winmill rules to unravel the deal, is potentially insurmountable said John Kaiser. “I’m not sure an unwind is even possible,” he said.

The group would have to take on significant debt (in the millions of dollars) and he doesn’t think there is the will among the doctors to create a business model that would allow the physicians to survive – a model that would mean excluding government-insured patients and charity care.

“We’ll be forcing ourselves into that mold that we said is not the best for the future.”

The trial wrapped up in November. A ruling was expected by the end of 2013, but the parties are still waiting for a decision from the judge.

[See also: Solo doctors have alternatives to hospital employment]